- Bitcoin cycles have been typified by huge runups and huge corrections
- This cycle appears to be different, with institutional buyers claiming to plan to hold for years
- There may be no uniform ‘topping out’ if this new paradigm plays out
Bitcoin pumps hard and then it dumps harder. Everyone knows the story, and indeed this volatility is why many have stayed away from the cryptocurrency sector altogether. Since Bitcoin’s first recognized bull run and subsequent dump in 2011 the pattern has repeated three times, but there is a sense that this time round things could be different, that we may have entered what Dan Held called a Bitcoin super cycle. What’s different about this current run, and what could it mean for Bitcoin’s future?
Institutional Bitcoin Holders Hold The Key
All past Bitcoin bull runs have been driven purely by retail investors, with the cream of the crop able to make absolute fortunes before the market reverses. The difference between this bull run and prior ones is that the makeup of those involved has moved from retail only to a combination of retail and institutional holders. This has resulted in masses of bitcoin being taken away from the market and into the holdings of institutional investors.
These corporate buyers, if we are to believe the press releases, are doing it as an alternative way to preserve the value of their balance in the wake of a devaluing fiat currency system. They say they are going to hold for years, unlike cycle traders who buy in the bear market and sell out in a bull market, which is why Bitcoin has always dumped so spectacularly.
Profits are Profits
Of course, it would be naïve to think that institutional buyers won’t at least be realizing profits on the way up. Ruffer Investments did just this in December, selling some of its holdings just a few weeks after buying in order to take out their principle. However, the reason why these institutions are buying is not, outwardly at least, to make a short-term profit from one of Bitcoin’s traditional explosive runs. The likes of MicroStrategy and Tesla have specifically stated that they have bought bitcoin as a hedge to the depleting value of the U.S. dollar, suggesting that their plans to not include selling, no matter what the Bitcoin price hits.
Were Bitcoin to hit, say, $100,000, MicroStrategy alone would be sitting on over nine billion dollars’ worth of bitcoin. At this point CEO Michael Saylor would be facing a boardroom pleading with him to realize at least some of its profits, and frankly it would be irresponsible of him not to, but if institutional investors really are in this for the long game then the selling will be nowhere near the levels we have at the end of prior bull runs. If you are genuinely holding bitcoin as a hedge to an inflating and depreciating dollar then why would you sell to it in full expectation that its value will decrease?
End of the 80% Dump?
Following this theory to its natural conclusion, and assuming that institutional adoption increases over time, there is the very real possibility that Bitcoin will not correct in the same way it always has, even after major milestones are hit. Of course there will be corrections as in any market, but the wealth is now spread among a wider range of holders, more of whom will not be interested in selling out completely when they think the top is in.
Fewer sellers equals shallower corrections, with the potential for increased competition in the dip buying stakes, suggesting that the traditional ‘topping out’ might not actually occur.
Big Test Could be coming Soon
Phase one of this new paradigm for Bitcoin is underway and has been for months now: institutions having been buying bitcoin by the bucketload, under the guise of holding it for years or even decades as part of a diversified portfolio. Phase two, when all indicators are that Bitcoin’s current bull run is coming to an end, will be the litmus test for these new buyers – will they be true to their word and hold, or will the temptation to realize profits be too great?
We won’t know until the time comes, but if the latter is true then there is every chance that the Bitcoin party could continue for far longer than anyone could have foreseen.
